Take your pick: choosing the right adviser

When you put your money in the hands of an adviser, how do you know they can be trusted to do the best for you? Jack Powell explains how to tell the good advisers from the bad.

So, you’re ready to invest your hard-earned money and you’ve decided to seek professional advice. How do you go about finding the right type of adviser?

A little research can go a long way. You can gather a lot of information online about individual advisers, their firms, and their investment philosophy, so that’s a good place to start.

Draw up a shortlist of people to review in more depth. First try company websites and LinkedIn to get an initial feel for what motivates the advisers. This will provide valuable insight into their investment views. If the firm doesn’t have an online presence, be warned: this is a strong red flag.

Referrals can be a good option. Ask friends and colleagues who they’ve been using, and how they’ve found the quality of advice and the level of service.

How much does it cost?

Take a close look at how the adviser charges for their services. There are many different costs associated with investment advice.

Advisers may charge a variety of fees, so it’s important that you understand all your options and all the costs associated with the advice you’re seeking.

Your first meeting with any adviser should be free. In this meeting, you should get a clear understanding of the fee structure that will apply to any advice and services they offer.

Here are some of the more common fee structures:

Hourly fee: The adviser may simply charge you an hourly fee for their time. This can be a good option if you’re simply looking to have an adviser review your current situation, or if you just want some general guidance on how to achieve your goals, but are happy to arrange and manage the investments yourself.

Plan-writing fee: As part of any engagement, there’s usually a plan-writing fee. This is usually charged to cover the time taken to prepare and present an investment proposal, known these days as a ‘Statement of Advice’. Some advisers will waive this cost if you move on to implement the recommended portfolio and become a client.

Implementation fee: Some advisers charge a one-off implementation fee simply to set up a portfolio. You’ll need to consider this carefully, because not all advisers charge it, and it may be negotiable.

Brokerage: Most share brokers are still paid by way of ‘brokerage’. Some companies do not agree with this fee approach, due to potential conflicts of interest, and it’s important you understand these fees in detail. I’d recommend you negotiate very hard on these fees, as they can vary from as low as 0.4 per cent up to 1 per cent, depending on the broker and the services you’ve agreed with them.

Ongoing portfolio advice, management and administration fees: If you’re engaging an adviser to manage your investments for the long term, they’ll usually be compensated by charging you a percentage fee, based on the total value of the funds they manage. This fee can vary from 0.4 per cent a year to 1.5 per cent a year, and depends on many factors.

After your first meeting, an adviser should be able to give you a general guide to the likely fees you’ll be charged. I prefer a capped administration fee – and for larger portfolios, you should consider this. This means the cost could be lower than quoted, but can never be higher. Advisers do have fixed overheads and compliance costs, so they should be open to a capped administration fee, especially for portfolios of NZ$5 million and above.

I’ve seen some clients being charged hundreds of thousands of dollars for a service that’s no different from a NZ$1 million portfolio. I often wonder how this higher fee can be justified. Fee structure is an excellent topic to discuss with the adviser.

Lastly, it is worth doing the maths to calculate the impact of the adviser’s fees on your likely returns.

In a world of low interest rates, where you might get only 3 to 4 per cent yield from a local bond, an adviser who charges brokerage and/or an administration fee will be taking most of your return in fees. You might want to consider if this makes sense, when you compare it with the return on cash in the bank.

What does your adviser invest into?

Don’t be shy about asking all advisers what they invest into. If they’re not investing themselves into the same solutions they’re recommending to their clients, it might be worth asking why that is, and where they are personally invested.

This is something that I ask all the fund managers and investment professionals we work with. If they’re not substantially invested into their own funds, then why should we recommend them to our clients?

Your portfolio

When you consider your adviser’s solution, you should ask: does it meet your needs and is it what you want?

A lot of advisers in New Zealand have a restricted offering of investments they can recommend. You need to understand whether the adviser can offer only in-house products or has access to the entire market.

Do they have an approved product list and, if so, how has that been compiled? It’s important that you get a good general understanding of the portfolio, and its expected performance, to ensure that it will meet your requirements.

If you don’t understand anything the adviser says, don’t be shy to ask them to explain. It’s their job to advise you, after all. If an adviser can’t explain an investment to you in a way that you understand, chances are it’s not the right investment for you. Never invest into anything that you don’t understand.

A safe pair of hands

You need to know the adviser’s level of experience in giving advice. Some advisers who are new to the industry may be very good at their role, but it’s important that you understand their skills to make sure they’re a ‘safe pair of hands’.

Advisers who have studied further may be Certified Financial Planners (CFPCM), which means they have completed a Business Diploma in Financial Planning and have been mentored for at least two years by another CFP-qualified adviser, or they may hold a suitable alternative degree.

But remember, when you consider the amount of time an adviser has been giving advice, more does not automatically mean better.

Experience counts

A good test question to ask is whether the adviser has experienced a major correction in the markets and, if so, how did they manage their clients’ portfolios through that process. This is an important thing to understand. When the markets fall is when good advisers really earn their fees.

Any adviser trying to sell their services solely on performance of investments raises a major red flag. This is something you’d expect from a green adviser. More battle-worn advisers know that past performance does not equal future performance, and there will be periods of outperformance and underperformance. This is simply the outcome of investing in a diversified way.

Consider asking the adviser for references from a few existing clients. If they’re good at their job, they should have many clients who are happy to provide a positive reference for them. Just make sure the referee is not their mum or dad!

Why have a financial adviser?

Maybe you already have an accountant and a legal adviser, and you can’t see the value in also having a financial adviser. So, how does an investment adviser differ from an accountant or a lawyer?

Firstly, the investment adviser’s jokes are better.

Seriously, when dealing with your financial planning, I recommend that the three parties – lawyer, accountant and financial adviser – all work together to provide you with the optimal solution.

As an example of how you might use these professionals, the accountant is best qualified to confirm the optimal tax structure, the lawyer is best qualified to confirm the best estate structure, and the investment adviser takes these recommendations and uses them to craft the optimal investment solution.

A long-term relationship

If you already have an adviser, are you comfortable with them? When you’re giving your funds to an adviser to manage, there is usually a minimum of a five-year commitment on your part, so you should be sure that you have a good working relationship with your adviser, and that you’re comfortable with their recommended solution.

If you have any concerns at all, don’t be shy about bringing these up with the adviser. If you don’t understand their answer, ask again and again until you do. This is your money, so you need to be sure you understand what is happening to it.

Your biggest protection will come from a good level of understanding of what’s being discussed, and your options.

Put in a little work upfront and this will give you peace of mind about your investments. Ask lots of questions. No question should be off limits.

This person will be looking after your life savings, so you’d better be able to understand and trust them.

By Jack Powell, Private Wealth Advisors

First published 20 November 2017

The editorial below reflects the views of the editorial contributor only and content may be out of date. This article is sourced from a previous JUNO issue. JUNO’s content comes from sources that it considers accurate, but we do not guarantee that the content is accurate. Charts are visually indicative only. JUNO does not contain financial advice as defined by the Financial Advisers Act 2008. Consult a suitably qualified financial adviser before making investment decisions.

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